I’ve written a number of articles over the past year on the looming problem of the Chinese debt situation. It’s currently just shy of 300% of GDP and this doesn’t bode well for domain investors reliant on cheap Chinese capital to purchase their domains at hugely inflated prices. So should we really panic?

I saw the following charts in a recent Bloomberg article that puts the Chinese debt problem into perspective. What’s interesting about this chart is that China’s flatter line shows that it’s not getting as big a GDP bang for its debt buck compared to some other nations. Also notice that Germany is retiring debt even while sharply increasing its GDP per capita.

The USA is continuing to increase debt while getting a lot of GDP per capita from it.....but the debt still continues to increase. At some stage the piper has to be paid and if the current trends continue it will be more when not if.

I watched the recent debate between presidential hopefuls Hillary Clinton and Donald Trump. Since I live Australia, you may ask why? I wanted to see whether either of the two candidates really seemed to understand the economic knife edge the world is currently balanced upon. Sadly, I was disappointed in what both of them had to say.

Other than a number of sound-bites there was nothing on issues such as China’s burgeoning debt Crisis and the impact this will have on the global economy.

Back on the 11th May 2016 the Financial times reported the Chinese Communist party’s flagship newspaper, the People’s Daily, published a front-page interview with an “authoritative figure” who warned that the country’s soaring debt levels could lead to “systemic financial risks”. This doesn't sound good....

On the 29th August the Australian Financial Review reported that prominent investor, George Soros, as seeing an “Eerie resemblance between conditions in China now and those in the US leading up to the financial crisis in 2008.” Remember, Mr Soros was the man that broke the bank of England in one of his currency trades.

I’ve taken a great deal of interest in the Chinese economy of late and I’ve written a number of articles that outline how everything is not so good in the dragon nation. Debt continues to skyrocket, GDP is levelling off and there appears to be stockpiles of commodities that are unused. So how is this all going to impact domain investors?

CNBC published an article, “Moody’s raises worries over China loans as Communist party paper calls debt load ‘original sin’”. Within the article, influential investors Kyle Bass and George Soros warn of a credit crisis in China, with Bass noting the presence of “ticking time bombs” in China’s banking system.

What really struck me about the article was the second video where an independent economist, Andy Xie, suggests that China’s real bad loan situation is closer to 20% and not the 1.5% being reported. He then went on to say that over half the loans relate to property and that all across the country buildings empty and that they are being traded like gambling chips. Everyone is hoping that someone else will pay more for the assets.

The Economist recently wrote an article titled, “The coming debt bust”, which outlined the fact that China’s overall debt is 280% of GDP. One scary statistic is that 16% of China’s top 1,000 firms owed more in interest than they earned before tax. Debt levels are expanding twice as fast as the economy. Market Watch recently indicated that it takes four units of credit for each unit of growth.

So will the Chinese authorities be able to manage the economy to a hard or soft landing? They have plenty of ammunition in their reserves (around $3 trillion) but more and more commentators believe that the current regime is playing catch-up to rapidly changing economic circumstances. What everyone appears to be saying is the debt piper is calling….

This is the third part in a series that examines domains and the Chinese economy. The first two parts can be viewd by clicking on the following links: Part 1 Part 2

The biggest concern with a Chinese economic downturn is the impact that it will have on the rest of the world. As companies reduce spending and hunker down during the economic storm domain valuations will be the recipient of a perfect storm of less demand and massively greater supply courtesy of the new gTLDs.

If you are considering an offer right now on a domain, then my advice would be to take it, as I believe we will be heading into some rough water over the next couple of years. I’ve never regretted having cash in the bank and if I’m right, then there’s going to be some real bargains available in the not too distant future.

The biggest concern for me is the value of domain traffic in a financial crisis. Users will still have value but I’m concerned whether the value will be fully realised by domain investors in a downturn.

The Global Financial Crisis (GFC) taught us that although domain traffic is valuable (businesses need customers) the position of domain investors in the domain ecosystem is currently quite weak. As the dominant advertising partner, Google is likely to try and take a greater share of the reduced volume of advertising dollars in a difficult market.

This is the second article in the series on China. Click here for part 1.

Off the back of all of the China debt crisis, what’s going on in the domain industry? For the past year many western domain investors have been scratching their heads as they tried to work out why the Chinese were buying up all of the 4 letter/number domains.

Other than a few reasons which were largely due to mysticism and numerology there was no sustainable underpinning of the value of many of these domains. In short, it was spectulation run mad that rapidly pushed up the prices.

Despite the underlying values being questionable there has been a rush by many western domain speculators to register short character domains. The total goal was to then sell these domains to Chinese investors for inflated prices. While some people have made money, many are in the process of losing their shirt as the giant global ponzi scheme comes crashing down.

I recently spoke with a Chinese investor that has over $50m to invest in domains and she indicated that they are putting just about everything on hold to see what’s happening with the market. The domain industry has just experienced a bubble fuelled by cheap money that was looking for another asset class to invest into. The rule of thumb for bubbles is to get in and get out really fast so if you're holding any of these domains then it may be a long time (if ever) before you see a return.